• No results found

Corporate Governance for a Changing World: Report of a Global Roundtable Series

N/A
N/A
Protected

Academic year: 2019

Share "Corporate Governance for a Changing World: Report of a Global Roundtable Series"

Copied!
105
0
0

Loading.... (view fulltext now)

Full text

(1)

      

City, University of London Institutional Repository

Citation

:

Veldman, J., Gregor, F. and Morrow, P. (2016). Corporate Governance for a

Changing World: Report of a Global Roundtable Series. Brussels, Belgium; London, UK:

Frank Bold; Cass Business School.

This is the published version of the paper.

This version of the publication may differ from the final published

version.

Permanent repository link: http://openaccess.city.ac.uk/18785/

Link to published version

:

Copyright and reuse:

City Research Online aims to make research

outputs of City, University of London available to a wider audience.

Copyright and Moral Rights remain with the author(s) and/or copyright

holders. URLs from City Research Online may be freely distributed and

linked to.

(2)

Corporate

Governance

for a Changing

World

(3)
(4)

Purpose of the Corporation Project. (2016). Corporate

Governance for a Changing World: Final Report of a Global Roundtable Series. Brussels and London: Frank Bold and

Cass Business School.

Authors: Jeroen Veldman, Filip Gregor and Paige Morrow. Design and layout: PORTA design and Susanna Arus.

About Frank Bold

Frank Bold is a purpose-driven law firm established in 1995 with four offices in the Czech Republic as well as offices in Brussels, Belgium and Krakow, Poland. The firm uses both business and non-profit approaches to solve social and environmental problems. Frank Bold provides legal expertise in corporate accountability and corporate governance to the European institutions as well as to civil society, municipalities, and businesses.

About the Purpose of the Corporation Project

After the Global Financial Crisis, the contemporary model of corporate governance became increasingly criticised for forcing corporations to focus on short-term profit maximisation for shareholders only at the expense of long-term strategising, innovation and sustainability. Continued reliance on this model limits the scope and impact of efforts by policy-makers to mitigate these effects.

A consensus has begun to emerge that corporations should focus on creating long-term sustainable value but that we lack clear vision on how to achieve this outcome. In order to produce more clarity on appropriate structures and practices for publicly listed corporations, Frank Bold initiated the Purpose of the Corporation Project1 (“Project”) to provide

a strategic, open-source platform for leading experts and organisations interested in promoting the long-term health and sustainability of publicly listed corporations in the areas of policy-making and business management. The academic basis for the Project is provided by Dr. Jeroen Veldman and Prof. Hugh Willmott, who run the Modern Corporation Project2 at Cass Business School, London. Between 2014 and

2016, the Project organised the Corporate Governance for a Changing World Roundtable Series to identify the outcomes that corporate governance should deliver and working back from there, design corporate governance which is fit for the challenges of the 21st century.

(5)

The Purpose of the Corporation Project and the Corporate Governance for a Changing World round-table series have been generously supported by the Charles Leopold Mayer Foundation for the Progress of Humankind, the Friends Provident Foundation, the Joseph Rowntree Charitable Trust, the Sigrid Rausing Trust, and the Wallace Global Fund. The Modern Corporation Project has been generously supported by Cass Business School.

The views and errors in this report are solely those of the authors.

Acknowledgements

The authors would like to thank the following individuals for their expert contributions to this project: Dr. Tristan Auvray, Michel Bande, Dr. Roger Barker, Nicolas Bernier-Abad, Prof. Yuri Biondi Dr. Stephanie Blankenburg, Prof. Sebastian Botzem, Marcel Bucsescu, Prof. David Collison, Prof. Alice Conchon, Prof. Alexis Constantin, Jan Cremers, Dr. James Cullen, Dr. Thomas Dallery, Prof. Jerry Davis, Prof. Marie-Laure Djelic, Dr. Barbara Dubach, Dr. Rory Ridley-Duff, Irene Heemskerk, Dr. Laura Horn, Prof. Paddy Ireland, Dr. Andreas Jansson, Dr. Markus Kallifatides, Prof. Christine Kaufmann, Prof. Andrew Keay, Idar Kreutzer, David Langstaff, Prof. William Lazonick Dr. Genevieve LeBaron, Prof. Jukka Mähönen, Richard Martin, Will Martindale, Dr. Daniëlle Melis, Flavia Micilotta, Ophélie Mortier, Dr. Katrin Muff, Herman Mulder, Jeremy Nicholls, Prof. Andreas Noelke, Dr. Ulf Larsson Olaison, Thierry Philiponnat, Prof. Jean du Plessis, Prof. Michael Posner, Prof. Antoine Rebérioux, Remko Renes, Dr. Jean-Philippe Robé, Dr. Andreas Rühmkorf, Prof. Blanche Segrestin, Prof. Andre Spicer, Stefan Stern, Prof. Lynn Stout, Prof. Lorraine Talbot, Dr. Georgina Tsagas, Prof. Charlotte Villiers, Christopher Wasserman, Janet Williamson, Prof. Hugh Willmott, and Zsofia Kerecsen.

The authors would like to extend special thanks to Prof. Andrew Johnston, Prof. Beate Sjåfjell, Prof. Tineke Lambooy and Dr. Gerhard Schnyder for their significant contributions to this report and their advice.

The authors would also like to acknowledge the following individuals who played a key role in organising the Corporate Governance for a Changing World roundtable series: Cécile Bonino-Liti, Prof. Karen Brenner, Marilyn Croser, Donna Dabney, Dr. Pascal Dey, Rosalien Diepeveen, Pierre-Samuel Guedj, Laurie Fitzjohn-Sykes, Dr. Gabriela Medici, Miguel Padró, Chantal Peyer, Prof. Florian Wettstein, and Yann Queinnec.

Finally, the authors would like to thank the members of the advisory group of the Purpose of the Corporation Project for their support and thoughtful advice: Paul Adamson, Betsy Dietel, Christopher Halburd, John Montgomery, Marcello Palazzi, Claire Thwaites, Dr. Allen White, and Rick Wartzman.

[image:5.595.83.505.628.789.2]
(6)

Contents

Executive Summary 5

Section I : Introduction 9

Section II : Framing of current debates on corporate governance 15 Building a stronger corporate governance model 18

Section III : Engaging with corporate governance 21

Corporate purpose in law 22

Embedding purpose in the governance stucture of a corporation 23 Dual-class share structure and industrial foundations 25

B Corporations and performance standards 25

Section IV : Fiduciary duties of directors and institutional investors 29

Fiduciary duties of corporate directors 30

Consideration of systemic risks and ESG factors 31 Fiduciary duties of institutional investors 32

Section V : Broader purpose and the board 37

Non-executive directors 38

Boards and strategic investors 39

Board diversity 39

Term limits and staggered boards 39

Director appointment, training and certification 40

Section VI : Revise incentive structures 43 Linking incentive structures to a long-term value creation strategy 44

Transparency of executive remuneration 45

Section VII : Stakeholders 49

Governance arrangements 50

Board representation for stakeholders 50

Consultation 51

Stakeholder and materiality analysis 52

Section VIII : Long-term and sustainable investment 55 Enlightened shareholder value and stewardship 56

Shareholder voting rights 57

Policy consistency, notification of substantial holdings, strategic direction

disclosure and registration 58

Takeovers 58

Section IX : Corporate reporting 61

Integrated reporting 62

ESG reporting 63

Governance and oversight 64

Conclusion 67

Recommendations 70

(7)
(8)

After the financial crisis, there has been considerable debate about the role of corporations in society. It has become broadly accepted that corporations - particularly the world’s largest publicly traded corporations – need to be governed with respect for the society and the environment. This is because corporations are dependent on the broader institutional and systemic framing for their long-term survival and because the most pressing of society’s problems cannot be solved without a contribution from corporations or by regulation alone.

However, this consensus has not yet been reflected in mainstream corporate governance models that have been narrowing since the 1970s in order to put the maximisation of shareholder value at the centre of corporate attention. As a result, the normative and theoretical framework of corporate governance theory and practice continue to encourage excessive risk taking at the expense of corporate resilience and the ability to create long-term sustainable value. This framework takes away a focus on investment in R&D and innovation, and in human and social capital. It also diminishes the capacity of corporations to anticipate and mitigate systemic risks. Beyond corporations, this model for corporate governance damages the interests of long-term shareholders and their end beneficiaries as well as States. In a broader sense, it contributes to rising inequality within firms and in society at large, and to a range of negative environmental and social impacts.

With this context in mind, the Purpose of the Corporation Project, an initiative of Frank Bold with the support of the Modern Corporation Project at Cass Business School, launched the Corporate Governance for a Changing World Roundtable Series on corporate governance. Events were held in Breukelen, Brussels, London, New York, Oslo, Paris, and Zurich. This brought together more than 260 leaders in business management, investment, regula-tion and academic and civil society communities with the aim of identifying desired outcomes and princi-ples of corporate governance fit for the challenges of the 21st century.

The roundtables sought to answer a number of central questions, the results of which have been synthesised into this report:

Executive Summary

→ How can corporate governance contribute to robust long-term value creation for companies? → What is the role of stakeholders, including

shareholders, in fostering a long-term focus on sustainable behaviour?

→ What incentives for short-termism exist in law, corporate governance codes and business practice?

Building on the expertise of leading practitioners and academics in both the U.S. and Europe, the roundta-bles identified desired outcomes and key principles for a new model of corporate governance capable of achieving these objectives. The roundtable par-ticipants provided examples of leading corporations that are already guided by these principles, demon-strating that this approach is not only possible but can also give corporations a competitive edge leading to better economic performance as well as to better long-term results in capital markets. The principal conclusion of this process was that the goal of the corporation should be to create long-term sustain-able value for customers and shareholders, while still contributing to societal well-being and environmen-tal sustainability. These objectives can be mutually reinforcing.

The roundtables confirmed that corporate law across all jurisdictions offers considerable scope in terms of the purpose of a corporation. The fiduciary duties of directors are typically not owed to the shareholders but rather toward the corporation itself, whereas the interests of shareholders are satisfied as a by-product of the success of the corporation. Even in jurisdic-tions where directors owe duties of loyalty and care to the shareholders as well as to the corporation, the business judgment rule entitles directors to take ac-count of a broad range of issues which they consider will further the interests of the corporation.

(9)

6 Corporate Governance for a Changing World

this process is restricted by the institutional setting in which corporations operate.

Taking this framing as the point of departure, the roundtables discussed a comprehensive set of options available to corporations, investors and policy-makers to create an institutional framework for corporate governance that supports a broad understanding of corporate purpose and fosters a focus of corporate strategy on long-term sustainable value.

These options are presented in this report in seven sections:

→ Embedding purpose in the governance structure of the corporation.

→ Clarifying fiduciary duties to restore the focus to long-term value creation.

→ Strengthening the role of the board to pursue a broad and long-term view of corporate purpose. → Revising incentive structures for directors and

executives.

→ Engaging stakeholders in corporate governance. → Improving shareholder engagement to foster

patient capital.

→ Integrating intangibles, non-financial capitals and ESG matters into corporate accounting and reporting models.

In these interconnected areas, the roundtables offered six sets of recommendations.

Firstly, corporations may choose to reflect their purpose and long-term focus in their governance structure, for instance by embedding these into their articles of association, choosing to register as a benefit corporation or seek B Corp status. Other options to reflect their purpose are to set up a dual class share system, vest voting shares in a foundation established to oversee a company’s purpose or engage stakeholder interests in the board. Policy-makers can facilitate these changes by amending corporate law to reflect best practices in other jurisdictions.

Secondly, the content of fiduciary duties, in particular with respect to the long-term success of the company, the focus on long-term sustainable value creation, stakeholder interests, ESG matters and systemic risks can be clarified by corporations, and, where appropriate, policy-makers. A clarified stipulation of duties - connected to an articulated corporate purpose - can be reflected in a corporation’s governance documents, strategic objectives, KPIs, reporting and executive incentive systems.

Thirdly, the interests of corporate stakeholders, in particular those that are essential to a corporation’s long-term success can be reflected in a more compre-hensive way in corporate governance arrangements. The roundtables considered that corporations could engage employee representatives and long-term investors with a proven track record of responsible engagement in their board or provide them with consultation rights. Corporations may also choose to reflect the interests of the stakeholders who can-not be directly engaged, such as the environment or people affected in global supply chains. This could be achieved by assigning responsibility to particular board members and establishing appropriate moni-toring mechanisms.

Fourthly, shareholders do not form a homogenous group with the same interests, agendas and capacities to engage in corporate governance. A corporate governance system that focuses on shareholder rights without further qualification amplifies the ability of parties with a short-term interest to engage. In response, boards could formulate a strategy of encouraging or discouraging specific types of investors. Similarly, policy-makers could adopt regulations that allow corporations to differentiate in their engagement with types of shareholders.

(10)

KPIs as benchmarks for their voting strategies, taking into account the interests of their end beneficiaries.

Finally, the academic curricula of corporate law, management, accounting and economics could be developed in such a way that they reflect a broad understanding of corporate purpose.

By organising the roundtables within multiple European jurisdictions and the U.S., and by involving main corporate governance actors and stakeholders, the report provides an empirical basis for comparative corporate governance, which assesses the strengths of best practices in their own jurisdictional setting. However, the cross-jurisdictional empirical basis for this report also indicates that it cannot present the final word on which corporate governance arrangements are the most effective. Different options and practices will be more appropriate in specific jurisdictions and for specific corporations. Further investigation and debate is necessary to elaborate further on how to reconfigure and integrate the key elements identified in this report into actual practice and policy-making.

(11)
(12)
(13)

10 Corporate Governance for a Changing World

Introduction

Perhaps the most important question for the economy is thinking through how corporations3 should be

managed and for what ends.4 Today we face complex challenges that cannot be addressed by

govern-ments or civil society alone, such as growing inequality, climate change, doing business within the limits of the planet’s resource boundaries and negotiating the complicated relationship between economic glo-balisation, development, and human rights. As corporations form the fabric of contemporary economies, corporate governance systems are central to the way economies function and their governance is of critical importance for engaging with these issues.

As concepts that would serve the public good, the stock exchange and notably the publicly traded corpo-ration originated in the 17th century.5 The global financial crisis showed to what extent the originally public

purpose of these concepts has been lost. In the post-financial crisis period, there has been considerable debate about how to create an opportunity to discuss the idea of public corporations and to find ways to align stakeholders in this debate towards a beneficial and forward-looking model.

The current phenomenon whereby corporations often fail to consider the long-term, as well as systemic risks and social and environmental challenges, can be traced to the fact that mainstream corporate govern-ance models have narrowed since the 1970s. Today, they typically identify the purpose of the corporation as the maximisation of shareholder value, as measured by share price.6 The growing tendency of capital

markets to focus on the short-term then puts the realisation of immediate market value at the centre of corporate attention. As a result, the normative and theoretical framework of corporate governance theory and practice now encourage excessive risk taking at the expense of long-term wealth creation, society and sustainability.7

In the last decade it has become broadly accepted that corporations - particularly the world’s largest publicly traded corporations8 – need to be governed with respect for the society and the environment.

This is partly because corporations are dependent on the broader institutional and systemic framing for their long-term survival and partly because the most pressing of society’s problems cannot be solved by regulation alone without a contribution from corporations. There is a growing recognition that the goal of the corporation should be to create real value for customers and wealth for shareholders, while contributing to societal well-being and environmental sustainability. These objectives should be mutu-ally reinforcing.9 The challenge of finding a manageable and acceptable solution to attain these often

contradictory goals forms the basis for this report, which reflects a trans-continental debate on the future of corporate governance.

With this context in mind, the Purpose of the Corporation Project (“project”), launched a Corporate Governance for a Changing World Roundtable Series (“roundtables” or “roundtable series”) on corporate governance with events in Breukelen (the Netherlands), Brussels, London, New York, Oslo, Paris, and Zurich.10 All of the roundtables were hosted by institutions with the joint aim to reflect on the role of

corporations in society. The full list of institutions is provided in the acknowledgments. The objective of the roundtables was to identify the principles of corporate governance fit for the challenges of the 21st century through a unique discussion that was global in scope but tailored to the particular characteristics of each region.

(14)

The roundtables sought to answer a number of central questions, the results of which are synthesised in this report:

→ How can corporate governance contribute to robust long-term value creation for corporations? → What is the role of stakeholders, including shareholders, in fostering a long-term focus on sustainable

behavior?

→ What incentives for short-termism exist in law, corporate governance codes and business practice?

The project’s first step was the publication of five succinct statements, developed and endorsed by lead-ing experts. These statements related to company law, management, accountlead-ing, economics, and politics. Each statement detailed how the contemporary corporate governance framework, and specifically its exclusive focus on shareholder value, affected the interests of other constituencies, the corporations itself and paradoxically, of the shareholders. These statements provided the roundtables with the problematisa-tion of the current practice.

The roundtables were held under the Chatham House Rule.11 Prominent speakers introduced the subject,

followed by an open discussion and a backcasting exercise.12 After each roundtable a draft report with the

main outcomes was sent out for further input by academics, leading to a final report for each jurisdiction

where a roundtable was held. Finally, each jurisdictional report was sent out to roundtable participants for approval. This final report presents a summary of reflections and best practices from all the roundtables, structured according to the main issues of the debate.

By organising the roundtables within multiple European jurisdictions and the US and by involving main corporate governance actors and stakeholders, the report provides an empirical basis for comparative corporate governance. It assesses the strengths of best practices on their own merits and in their own institutional setting. Taking into account the unique characteristics and contributions of each individual jurisdiction, these best practices provide the basis for a comprehensive set of interrelated proposals that can be used to improve corporate governance theory and practice.

This emerging approach to corporate governance can be beneficial to corporations, investors and other practitioners, as well as to a wider set of stakeholders who take part or are affected by corporate gov-ernance. It could help corporations to focus on a broad and long-term oriented understanding of their purpose, on creating long-term sustainable value, building resilience, and sustaining a strong social license, by aligning their strategies with the interests of society and taking into account systemic risks such as climate change and growing inequality.

However, the cross-jurisdictional empirical basis for this report also indicates that it cannot present the final word on what corporate governance arrangements are most effective for implementing a broad understanding of corporate purpose and for fostering long-term sustainable value creation. Different op-tions and practices will be more appropriate in specific jurisdicop-tions and for specific corporaop-tions. Further investigation and debate is necessary to elaborate how to reconfigure and integrate the key elements identified in this report into practice and in policy-making.

The report presents the outcomes of the debate from the roundtable series in several sections.

→ Section II gives an overview and framing of the main issues in contemporary corporate governance and practice.

→ Section III describes the role of leadership, culture, and soft law including how corporate purpose is actually defined in law. The section continues with a description of the options for embedding purpose in the governance structure of the corporation through governance documents and share structure.

(15)

12 Corporate Governance for a Changing World

→ Section V addresses the role of the board in the relation to corporate purpose.

→ Section VI outlines options for improving incentive structures for directors and executives by reflect-ing corporation’s long-term interests.

→ Section VII looks at the ways in which other stakeholders and interests may be reflected in corpo-rate governance. Section VIII discusses how to harness the potential positive impact of shareholder engagement while containing the risks of short-termism associated with shareholder activism. Additionally, it addresses how to encourage long-term and sustainable investment.

→ Finally, section IX presents the debate on corporate reporting and accounting models, addressing integration of financial and ESG information in corporate strategy. Governance and implementation advice is included in this final section.

(16)
(17)
(18)

Section II

Framing of

current debates

on corporate

(19)

16 Corporate Governance for a Changing World

Framing of current debates on

corporate governance

To start the debate on the revision of corporate governance, this section provides a short overview of current debates in corporate governance with a focus on the effects of shareholder primacy. Broadly, corporate governance may be understood as:

How corporations are administered and structured → By whom: the issue of corporate control

By what: institutions, laws, regulations & markets → For whom: for what purpose

The answers to these basic questions provide a structure for procedures and processes that direct and control business.13 Accordingly, the corporate governance model in use is crucial for a broad range of

issues, both inside and outside the corporation. Over time, different corporate governance models have been developed that answer these questions in different ways.14 From the 1970s onwards, mainstream

corporate governance models have gradually narrowed toward identifying the purpose of the corporation to the maximisation of shareholder value.15

The shareholder primacy model’s limited understanding of corporate purpose brought with it a restricted interpretation of the legitimate scope of managerial discretion.16 American economist Milton Friedman

argued that shareholder primacy requires boards to consider that any goal but shareholder value creation is outside the valid scope of its strategy.17 This notion couples shareholder primacy to a normative model

for corporate strategy, which creates pressure on executive managers to ignore ESG factors and systemic risks and to pass the unaccounted costs of such a short-term approach onto broader society - what economists call negative externalities.18

Shareholder primacy rapidly became the normative focus for corporate governance theory and practice by being adopted into the curricula of many law and management schools, accounting theory, corporate governance codes and incentive structures.19 This approach to corporate governance has materialized in a

focus facilitating and encouraging the monitoring of corporate performance by markets, the rise of inves-tor activism in relation to corporate strategy, increasingly short shareholding periods,20 growing pressure

on fund managers to provide financial returns in the short run,21 pressure for quarterly reporting,22 an

increasing focus on the use of stock options for executive compensation23 and a decrease in CEO tenure.

This broad institutional change has caused boards and executives to adopt short-term strategies24 that

increase the payout ratio to shareholders, mostly by raising the proportion of corporate profits spent on dividends and share buybacks, and by engaging in M&A transactions.25

Shareholder value as a model for corporate governance helps to focus managerial activity on lifting the immediate market valuation of the firm. However, it can induce excessive risk-taking at the expense of long-term value creation26 and to the detriment of other stakeholders.27

The significant risks of this model have become visible in their effects on corporations and on broader society:

Resilience - The increasing focus on the role of investors in corporate governance and the develop-ment of a market for corporate control makes public corporations increasingly susceptible to financial cycles and the volatility of financial markets,28 while also strongly influencing the strategic orientation

(20)

“a significantly unimportant factor in the typical investor’s buy and sell decisions”.29 Academic studies

show how this focus leads boards and managerial executives to engage in allocating an increasing percentage of profits to dividends and share buybacks.30 In turn, this hollows out the capacity of

corporations to re-invest and secure their long-term existence.31

R&D and innovation – Shareholder value as an exclusive strategic focus limits funds available for research and development. This impacts negatively on productive investment, dampens innovation and in the long run reduces competitive advantage.32

Human and Social Capital – Shifting profits to CEO remuneration and shareholder value can come at the expense of investment in employees,33 whose skills and motivations play a crucial role in

cor-poration success. Such shifting of priorities also undermines the social license of corcor-porations and potentially adversely affects access to resources, cooperation with public authorities, ability to attract talent, and, not least, the quality of relations with customers and other affected groups.34

Recognising and mitigating systemic risks – The short-term focus endemic to shareholder primacy prevents corporations from anticipating the materialisation of systemic risks and building a long-term strategy that would mitigate the impact of such risks.

According to Larry Fink, CEO at Blackrock, short-term perspectives are taken at the expense of “innova-tion, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”35 In

the wake of the financial crisis, it became widely recognised that the constant pressure for short-term market-oriented results created an environment that presented risks to those corporations.36 In practice,

such pressures are driving increasing numbers of publicly traded corporations to leave the open market and become private corporations.37

In the roundtables, there was broad recognition38 that shareholder primacy presented a problematic

theory of the corporation and of corporate governance. It was aptly termed “one of the fundamental fault lines of our economic model” by Roger Barker in the London roundtable.39 In addition to the range

of impacts on corporations outlined above, there has been further impact on innovation40 and economic

growth41 and an increase of systemic risks hampering the potential for corporations to play a beneficial

role in society.42

More specifically, shareholder primacy is associated with the following implications for society:

Long-term shareholders and end beneficiaries – Because a strategic focus on the short term comes at the expense of a focus on long-term development of the corporation43 investors with a long-term

perspective are typically not served by shareholder primacy. Damaging the long-term interests of corporations also hurts end beneficiaries with a long-term horizon for their investment, mostly people who are saving to fund retirement or support their children’s education.44

Tax - Shareholder primacy has led some boards of directors to believe that they have an obligation to reduce their corporations’ tax liabilities by engaging in tax avoidance. The most notable recent examples are provided by the Luxleaks and Panama Papers scandals. These practices externalise risk by reducing the corporate tax quote and thereby indirectly increasing the tax bill paid by citizens and local corporations.45 Reducing the tax income of states reduces the capacity of states to invest in

infrastructure, education, and R&D.46

Inequality - Shareholder primacy produces pressure to increase the share of corporate revenue go-ing to profits. This is often done by creatgo-ing precarious contract conditions for employees and by avoiding or reneging on implicit and long-term aspects of contracts, such as health care coverage, career ladders and progression, and pension liabilities. In combination with tax avoidance, shareholder primacy is connected to growing income inequality, both within corporations47 and in the broader

economy. 48

Sustainability - The systemic risks connected to environmental sustainability can be expressed by the concept of planetary boundaries,49 which, in a business context, gives rise to the risks of stranded

(21)

18 Corporate Governance for a Changing World

Building a stronger corporate governance model

At the Zurich roundtable, it was suggested that “the role of corporate governance is not only to protect the corporation but to ensure that a corporation is able to create value for society at large.”51 Paul

Polman, CEO of Unilever, has similarly argued that sustainability is not only compatible with profitability, but indispensable for a corporation’s success in the long-term.52 The roundtable participants further

considered that a desirable corporate governance model would see the creation of real value for customers53 and shareholder wealth creation as joint and mutually reinforcing objectives.54 This model

embraces environmental sustainability and societal well-being,55 takes into account systemic risks and

opportunities56 and adopts both financial and ESG benchmarks57 to measure corporate performance

over the long-term.58

Summary

Recommendations

Over time, different corporate governance models have been created to answer the questions how, by whom, by what and for whom corporate governance should organise the procedures and processes that direct and control business. From the 1970s onwards, mainstream corporate governance models have narrowed so that the purpose of the corporation has been reduced to the maximisation of shareholder value. The narrowing in perception of the legitimate scope of corporate purpose and managerial discretion have focused boards and executives to adopt short-term strategies that increase the payout ratio to shareholders. This is mostly done by raising the proportion of corporate profits spent on dividends and share buybacks, by engaging in M&A transaction and by increasing externalities. This focus on excessive risk-taking is at the expense of other stakeholders and of long-term value creation.

This shift towards shareholder value and short-term strategies has had a number of adverse effects on corporations and on broader society, and has, amongst others, con-tributed to the following:

Reallocation of risks and rewards to a small set of corporate constituencies, contrib-uting to growing inequality.

Undermined corporate resilience and diminished their ability to create value in the long-term and invest in R&D and human and social capital.

Slower innovation and economic growth.

Diminished capacity to anticipate and mitigate systemic risks that threaten the whole of society, such as climate change and financial crises.

Reduced the potential for corporations to play a beneficial role in society.

(22)

Create real value for customers and wealth for shareholders as joint and mutually reinforcing objectives.

Take account of environmental sustainability and societal well-being.

Take into account systemic risks and opportunities.

(23)
(24)

Section III

Engaging with

corporate

(25)

22 Corporate Governance for a Changing World

Engaging with corporate

governance

To begin the process of developing a new model for corporate governance, the participants in all round-tables discussed culture and leadership as important elements of a broader concept of corporate govern-ance and in order to achieve change. Broad sections of the literature on corporate governgovern-ance confirm the centrality of culture,59 while the draft Dutch Corporate Governance Code and the new South African60

code see culture as the ‘driving force’ of the corporation and argue that it is impossible to run a successful business without considering its values.

Important features of culture, such as accountability and openness, are seen as essential to the success of the corporation because they help to gather information internally as well as on the constantly evolving external business environment.61 In this spirit, New York roundtable participants argued that the ‘tone

from the top’ was key for taking long-term oriented decisions and addressing sustainability challenges, while participants at the Zurich roundtable argued that corporations should improve corporate culture and values, and use them proactively.62

The roundtables also recognised that a healthy culture requires a strong ethos, usually inspired by re-spected leaders. Although such a culture cannot be mandated from outside, it does rely on support from the institutional setting in which leaders and corporations operate. In this framing, systemic change is hard to achieve by only encouraging leadership and a change of culture if the prevailing perspective in corporate governance practice and regulation remains geared towards shareholder primacy. This is also the case if the focus on short-term share price increase has become embedded in the institutions that direct corporate governance theory and practice.63

What is needed, therefore, is a broader conceptualisation of the implicit assumptions that govern the direction of corporate governance and the scope for corporate strategy. This conceptualisation starts with the purpose of the corporation.

Corporate purpose in law

Since the 1970s, the idea that corporations exist solely for the benefit of their shareholders has become dominant.64 The idea was developed first in U.S. academia and, in the 1980s and 1990s, was increasingly

adopted in business and policy-making.65 In continental Europe, this notion has been less successful in

altering the common perception that corporations generally exist to serve society. Nevertheless, it was gradually adopted in academic curricula and in the regulation of corporate governance and accounting.

The problem with the idea of shareholder primacy is that it does not match the legal foundation of the corporation. Shareholders have certain unique rights relating to organisation and control of the corpora-tion,66 but the notion that shareholders own corporations outright is not consistent with corporate law

in any jurisdiction worldwide.67 Similarly, the idea that shareholders are prioritised claimants to corporate

value, either through residual claims or through claims of efficiency, are contentious.68

For various historical reasons, shareholders in public corporations have rather limited and restricted claims to control.69 Claims to shareholder primacy - and associated claims to corporate control and to

(26)

Corporate law across all jurisdictions offers considerable scope in terms of the purpose of a corporation.71

A corporate purpose may be whatever its founders wish to embed in the corporation’s constitution and culture, as long as it is legal. A corporation may decide to maximise quarterly profits and short-term share price or may choose to make innovative products, develop cutting edge technology, build a spaceship, create the next antibiotic, foster a great working environment for employees, drive the shift to renewable energy or one of many other objectives.72 The key is that the purpose is permissive to a broad range of

subjects and is not required by law.

The defining attribute of a corporation is that it is a legal entity,73 separate from its key stakeholders,

including its shareholders and which benefits from specific privileges and protections.74 The (fiduciary)

duties75 of executives are not owed to the shareholders but rather to the corporation itself.76 The interests

of shareholders are satisfied as a by-product of the success of the corporation. For example, Swiss law states that the responsibility of management and directors is towards the success of the company.77

Under UK law, which since 2006 has explicitly mandated directors to promote the success of the company for the benefit of its members (shareholders) whilst having regard to various wider concerns, the duty is owed to the company rather than the shareholders directly. In the EU context, the EU Takeover Directive stipulates a duty for directors to act in the interests of “the company as a whole”.78

The principle that directors’ duties are owed to the corporation, rather than (exclusively) to shareholders, has important implications for enforcement79 and for corporate governance. Even in US corporate law,

including in states like Delaware, where the directors owe duties of loyalty and care to the corporation as well as directly to its shareholders, directors are entitled to take account of any stakeholder interest they consider will further the interests of the corporation and in doing so they are protected by the business judgment rule.80

Taking the fiduciary duties toward ‘the corporation’ as the point of departure, the roundtable participants argued that the generic purpose of the public corporation from a practical point of view is to be successful over a long-term period and in doing this, ought to satisfy the interests of all its stakeholding constituen-cies.81 This was reflected in the discussion on the Dutch Corporate Governance Code, which states:

“The Code is based on the principle generally applied in the Netherlands that a company is a long-term alliance between the various stakeholders of the company. Stakeholders are groups and individuals who, directly or indirectly, influence – or are influenced by – the attainment of the company’s objectives: em-ployees, shareholders and other lenders, suppliers, customers, the public sector and civil society. The management board and the supervisory board have overall responsibility for weighing up these interests, generally with a view to ensuring the continuity of the company and its affiliated enterprise, as the com-pany seeks to create long-term value for all stakeholders.”82

Therefore, in holding fiduciary duties toward ‘the corporation’ a board is required to maintain a healthy balance between the interests of the corporation’s stakeholders and to society at large. What is more, this requirement should follow from and be embedded in corporate governance institutions, rather than voluntary CSR.83

Embedding purpose in the governance structure of a

corporation

(27)

24 Corporate Governance for a Changing World

A clear statement of purpose may:

→ Introduce legal clarity in relation to pursuing specific goals, including those related to the social and environmental issues connected to the corporation’s business,

→ Frame directors’ fiduciary duties and liabilities,

→ Clarify which audiences and matters the corporation directors consider material for the corporation,84

→ Introduce clarity about the investment and payout horizon to investors; and

→ Allow corporations to pursue long-term strategies (especially those involving R&D which entail a high degree of uncertainty, or reacting to systemic risks).85

The statement of purpose could be supported by a new director/board duty to develop long-term plans specifying how this purpose will be fulfilled. In this respect, statements of purpose might cover environ-mental, social or scientific goals. Statements could also refer to planetary boundaries, international law or other external standards.

In the Dutch roundtable, it was suggested that the corporate statement of purpose could be revisited at annual stakeholder meetings, which resemble annual general meetings with additional stakeholders. This would allow corporation and stakeholders to arrive at a shared understanding of corporate purpose.86

Policymakers can foster this practice through supportive changes to corporate law. In this respect, cor-porate law may:

→ Allow corporations to implement changes to their purpose and governance to reflect a broader purpose and use a ‘mission-lock’ to secure those changes.87 This could be achieved by requiring a

supermajority of shareholder votes to change relevant provisions.88

→ Allow corporations to specify their long-term social purposes in constitutional documents to ensure the accountability of directors to shareholders for implementing plans to meet these purposes and to provide protection against shareholder proposals that contravene the corporate purpose.89

→ Recognise a director duty to develop long-term plans to meet specific societal objectives relevant for their corporation e.g. to take into account the planetary boundaries and annually report to sharehold-ers on how these plans are being implemented.

The first steps in this direction may be found in recent developments of corporate law and corporate governance codes around the world. For example, the latest drafts of corporate governance codes in the Netherlands90 and South Africa91 have explicitly moved to adopt a broad purpose for the corporation.

Another important element is the broadening of reporting standards to include ESG matters. The EU Non-Financial Reporting Directive92 stipulates that large public corporations should include the following

in their annual reports: information on their position, development, performance, and the potential impact on environmental, social, human rights and corruption issues.

One way for corporations to embed a broader purpose into their mission is by making use of the Benefit Corporation legal form, when available, or other legal forms that make it easier for corporations to pursue societal objectives, such as cooperatives.93 Thirty U.S. states and Italy have authorised the new voluntary

for-profit corporate form of Benefit Corporations, which incorporates the following elements: a require-ment to create general public benefit, for which directors are accountable to shareholders; a duty of directors to consider the interests of other stakeholders; and an obligation to report on their social and environmental performance against their commitment to create public benefit. The Benefit Corporation legal form allows protections for other constituencies, for example against derivative suits and other types of pressure from activist investors, as well as commitments to responsible, sustainable conduct, both of which can be enforced by shareholders.94

(28)

Dual-class share structure and industrial foundations

The roundtable participants recognised that demands for the maximisation of short-term performance are of particular concern for boards in markets that do not permit protection against takeovers95 and for

boards of corporations that do not have a major controlling shareholder.96 Two options were identified

for corporations to use share ownership and voting rights to protect their purpose: adopting a dual-class share structure with differentiated voting rights and vesting voting shares in a foundation set up to oversee corporate purpose.

A dual-class share structure allows the designation of one class of shares as having voting rights while the second class of common shares typically has no or limited voting rights. The benefits of a dual-class share structure include that it allows corporations to retain control over long-term business strategy and vision, and to resist takeover bids by allotting these shares to the founders, employees or other limited groups of patient and informed stakeholders, who understand the corporation’s strategy and are prepared to take the longer term view in the face of uncertainty under potentially difficult financial circumstances.

Dual class share structures are particularly common in Scandinavia but also within Silicon Valley tech-nology firms, representing approximately 7% of all public corporations, including Google, Facebook and Amazon, as well as media conglomerates such as the New York Times.97 In the London roundtable, Roger

Barker of the UK Institute of Directors argued that “multiple voting structures should be permitted on the London Stock Exchange to allow UK-listed companies to compete with their rivals in the US and Asian technology industries, provided the process is transparent and appropriate to the company.”98

Another way to engage with dual class share structures in relation to corporate purpose is to use an industrial foundation structure.99 The Danish pharmaceutical corporation Novo Nordisk, for example, has

listed publicly traded common shares without significant voting rights, while a foundation retains control over approximately 25% of its share base, representing 75% of voting shares.100 This setup has allowed

the corporation to retain its main purpose to cure diabetes and adopt a triple bottom line strategy. Novo Nordisk is one of the largest corporations by market capitalisation across the Nordic region and globally in the pharmaceutical sector.101 Other examples of globally competitive industrial and financial corporations

with nonprofit foundations holding controlling interests include Carlsberg, Heineken, Ikea, and Triodos Bank.

B corporations and performance standards

Another way to embed purpose is through B Corp certification. This requires that the corporation integrate a commitment (i.e. broader societal purpose) to stakeholders in its governing documents, similar to the Benefit Corporation legal form described above. In addition, B Corp certification provides a comprehensive model for embedding a broader, socially aligned purpose in the governance of a for-profit corporation.102

Summary

(29)

26 Corporate Governance for a Changing World

The roundtables identified several options for corporations on how to protect their purpose:

Embed a clear statement of purpose and corresponding rights and responsibilities of directors, shareholders, and other stakeholders in a corporation’s governance documents and articles of incorporation.

Use dual-class share structures with differentiated voting rights, where available.

Vest voting shares in a foundation set up to oversee a corporation’s purpose.

Register as a Benefit Corporation or other alternative legal form established to protect social purpose or obtain B corporation certification.

The roundtables also identified how corporate law and corporate governance regulation can foster purpose driven corporations. Accordingly, this framework could:

Clarify in law and in corporate governance codes the societal purpose of corpora-tions and their duties toward internal and external constituencies.

Allow corporations to protect their purpose in governance documents and arrangements.

Require corporations to specify their long-term social purposes in their constitu-tional documents.

Recognise a director duty to develop long-term plans in order to meet specific soci-etal objectives relevant for their corporation, and annually report to shareholders on how these plans are being fulfilled.

Allow for the use of dual class share structures and industrial foundations.

(30)
(31)
(32)

Section IV

Fiduciary duties

of directors and

institutional

(33)

30 Corporate Governance for a Changing World

Fiduciary duties of directors

and institutional investors

The term fiduciary duty is used primarily in UK and US law but the basic concept of an obligation based on trust to act in the best interest of another person is widely held across both common law and civil law jurisdictions. There are two separate forms of fiduciary duties that are relevant to improving corporate governance: those of institutional investors (such as pension fund trustees) and those of corporate direc-tors.103 These are explored separately below.

Corporate directors owe fiduciary obligations to the corporation.104 In this context, roundtable participants

explored the reasons and the extent to which the content of fiduciary duty has become confused with serving the perceived interests of the corporation’s present shareholders and has been simplified to mean managing short-term market value increases. Roundtable participants also discussed how fiduciary duties toward the corporation could be used to restore the focus on long-term value creation.105 In the case

of institutional investors, the key issue addressed in the roundtables was the challenge for institutional investors to identify and reflect the end beneficiaries’ interests in their strategy.106

The roundtables confirmed that corporate directors as well as institutional investors are legally permitted to take into account environmental, social and governance (ESG) factors as long as they are a part of legitimate business strategy.107 In this regard, systemic risk is the main issue that connects notions of

corporate director fiduciary duties with the fiduciary duties of investors. A strong focus on short-term performance can destroy shareholder value in the long run because it hollows out the corporation and turns directors away from strategic considerations that mitigate corporation specific as well as systemic risk.

The roundtables explored options that corporations and investors can use to clarify fiduciary duties to-ward the long-term and how policymakers can support this shift.

Fiduciary duties of corporate directors

Although there is significant difference in the ways that various countries approach corporate governance more broadly,108 the fundamental principles of directors’ duties and liabilities across Europe and in the

U.S. are similar. In brief, corporate directors have a duty to act in the best interests of ‘the corporation’.109

Similarly, the specific content of what a fiduciary duty is and to and by whom duties are owed, is a matter of legal debate, which has arrived at different conclusions in different jurisdictions.110 Nevertheless, the

common cross-jurisdictional point surveyed in this project is that directors are permitted to focus on long-term value creation for the corporation to the benefit of its members, meaning all present as well as future shareholders.111

A recent study funded by the European Commission concluded: “Directors’ duties are owed primarily to the corporation, i.e. to the legal entity and not to the shareholders owning that entity. This basic principle is universally accepted and undisputed.”112 The same view has been voiced by leading corporate

govern-ance commentators in the US113 and elsewhere.114 Furthermore, the fiduciary duties of directors cannot be

disentangled from a long-term perspective on the corporation as an ‘entity’, and the collection of interests from a number of corporate constituencies that this idea represents.115

(34)

the Dutch Corporate Governance Code - Proposal for revision118 states: “The management board is

ex-pected to adopt a view on long-term value creation for the company” and “the value created should be for the long-term benefit of all stakeholders, including but not limited to shareholders and employees.”119

In accordance with this model, the roundtables recommended that corporations clearly acknowledge and publicly affirm that the duty of their directors is:

→ Toward the corporation as a whole;

→ To protect the long-term development of the corporation;

→ To avoid contributing to systemic risks that cause negative impacts on corporate stakeholders and society at large; and

→ To specify how stakeholders’ interests will be taken into account.

The roundtables also discussed the necessary tools to embed this approach in a corporation’s governance documents, strategic objectives, key performance indicators (KPIs), reporting and executive incentive systems.120 These tools are presented in dedicated sections of this report.

Consideration of systemic risks and ESG factors

In all jurisdictions, directors are under obligation to proactively and critically evaluate the material financial risks and opportunities to their corporation. As it is undisputed that directors are legally permitted to take account of ESG factors,121 the roundtable participants discussed what the scope of this duty could

be. In particular, this discussion pertained to environments where systemic issues are present i.e. climate change,122 growing inequality, stagnating economic growth and instability of the global financial system,123

but where it is difficult to ascertain the impact of individual actors and where coordinated action is needed to mitigate these systemic risks.124

In addition to direct business risks, such as the risk of stranded assets or changing market conditions, and physical risks, such as scarcity of resources,125 the failure to consider environmental and social factors

carries a number of other risks, including:

Regulatory risk: corporations that fail to act proactively with regard to changing legislation may face penalties or diminished value, e.g. as carbon emissions legislation is introduced and subsequently enforced.

Shareholder activism risk: a growing number of shareholders (institutional investors, civil society groups, or trade unions) are using shareholder litigation to pursue corporations and their directors for material failures. Additionally, shareholders frequently use shareholder proposals and/or divestment campaigns to target corporations.126

Litigation risk: affected stakeholders, including workers and local communities, use either local or transnational litigation against corporations who lose their social license to operate and may have violated relevant national or international norms, particularly in high risk industries such as mining. → Reputational risk: rapidly evolving societal expectations regarding corporate behavior mean that

corporations must react quickly and proactively to issues as they arise, e.g. allegations of modern slavery in supply chains.

The roundtables identified several strategies that directors can employ to be able to effectively react to these issues:

(35)

32 Corporate Governance for a Changing World

→ Assess and address systemic risks associated with the corporation (e.g. climate change and its im-pact on a corporation’s viability) and develop policy on how to avoid or mitigate associated risks at corporation level.127

→ Develop a business strategy that connects the mitigation of systemic risks to the long-term develop-ment of the corporation and its strategy.

Policymakers may encourage this focus by clarifying the content of fiduciary duties with respect to the concrete outcome in terms of systemic risks and the environmental and social issues relevant for par-ticular industries, e.g. the production of financial stability for banks and other financial intermediaries;128

the mitigation of environmental impacts for extractive corporations; and the development of fair and sustainable supply chain models for apparel corporations. They could take into account issues like en-vironmental concerns, health and safety, human rights and corruption.129 Policymakers could also clarify

director liability for any serious impact caused or contributed to by the corporation.130

Another way to embed systemic risks into corporate strategy is by linking them to ‘in control’ state-ments.131 As directors must make business decisions that are in the best interests of the corporation as an

ongoing entity, the notion of ‘in control’ could be coupled to disclosure of the risks associated with ESG issues (see also Section IX).

Fiduciary duties of institutional investors

Institutional investors play a crucial role in modern economy by permitting citizens to save for their fu-tures and by generally contributing to the stability and long-term prosperity of our productive system. Through the active and passive investment policies they choose to adopt, institutional investors influence the extent to which corporate directors are able to adopt a broader concept of corporate purpose. At the same time, institutional investors also have a fiduciary duty to act in the interest of their beneficiaries.132

Because they invest on behalf of a large number of small investors, in principle, their duty is long-term ori-ented and should take account of the long-term viability of the systemic setting in which the investment is made.133 Nevertheless, institutional investors are under pressure to generate short-term returns and

cannot automatically be relied upon to provide monitoring and engagement that will support long-term value creation for corporations (see Section VIII).

To provide support for aligning institutional investment with a long-term strategic horizon, the roundtable participants provided several suggestions:

1. In order to support long-term value creation and manage both their investee corporations’ and their own risk exposure, institutional investors should engage with boards and request that they address systemic risks.134

2. Public (dis-) engagement campaigns135 by investors can play an important role in convincing

corpora-tions to adopt ESG goals.136 In the Zurich roundtable,137 it was suggested that to incentivise

corpora-tions, investors can support their engagement strategies by positive publicity campaigns. Divestment can be used as a last resort option, should engagement fail.

3. ESG performance and attention to systemic risks correlate with superior long-term financial perfor-mance.138 Institutional investors should therefore request that corporations integrate ESG factors in

their reporting.139

4. The strategy of agents down the investment chain should be aligned with the specific investment strategy set by the institutional investor or by the beneficiaries.140

(36)

6. In several roundtables it was suggested that the role and responsibilities of fund managers and proxy advisers as well as analysts could be clarified.142

Summary

Recommendations

There are two distinct forms of fiduciary duties that are relevant to improving corporate governance: (1) those of corporate directors to promote the success of the corporation, owed to the corporation itself and (2) those of institutional investors (such as pension fund trustees) to act in the interest of their beneficiaries, owed to those beneficiaries. The roundtables confirmed that corporate directors, as well as institutional investors, are legally permitted to take environmental, social and governance (ESG) factors into account. Furthermore, in all jurisdictions, directors are under obligation to proactively and critically evaluate the material financial risks and opportunities to their corporation. Similarly, institutional investors like pension funds invest mostly on behalf of broad sets of small investors with a long-term horizon. As the duty of institutional investors is, in principle, long-term oriented, they should take account of the long-term viability of the systemic setting in which this investment is made and should be expected to provide monitoring and engagement that will support long-term value creation for corporations and their own beneficiaries.

In practice, the expectation of boards and institutional investors to adopt a broader con-cept of fiduciary duties is undermined by the prevailing corporate governance model. This model puts pressure on all parties involved in corporate governance, including boards and institutional investors, to focus on the short term.143 The failure to adopt

a broader concept of fiduciary duties carries a number of risks. These may undermine the long-term viability of corporations and beneficiary expectations, including direct business and physical risks, regulatory risk, shareholder and stakeholder litigation, as well as a potential risk to reputation.

In this context, the roundtable participants identified several recommendations for how fiduciary duties can be used to restore the focus on long-term value creation:

Recommendations for corporations and their directors

Clearly acknowledge and publicly affirm that it is the duty of directors to: • Protect the long-term development of the corporation;

• Evaluate salient environmental and social risks connected to the business of their corporation;

• Mitigate negative impact on corporate stakeholders and society at large and to specify how stakeholders’ interests should be taken into account;

• Assess and address systemic risks associated with the corporation.

(37)

34 Corporate Governance for a Changing World

Include systemic risks, sustainability and other relevant ESG factors in ‘in control’ statements.

Recommendations regarding the fiduciary duties of institutional investors

Develop a strategy taking account of ESG matters, systemic risks, and engage with the boards of investee corporations, reflecting end-beneficiaries’ long-term interest and time horizons for the investment strategy. Integrate this strategy in internal incentive schemes.

Support engagement and/or disengagement strategies, as well as positive publicity campaigns.

Request the investee corporations to integrate ESG factors in their reporting.

Align the strategy of agents down the investment chain with the specific invest-ment strategy set by the institutional investor.

Recommendations for policy-makers

Clarify the liability of directors for serious impacts caused or contributed to by the corporation.

Clarify the content of fiduciary duties with respect to specific environmental and social issues relevant for particular industries, e.g. systemic financial stability in the case of banks, the mitigation of environmental impacts for extractive corpora-tions, and the development of fair and sustainable supply chain models for apparel corporations.

Require greater transparency by investors regarding their engagement strategy with respect to ESG risks.

(38)
(39)
(40)
(41)

38 Corporate Governance for a Changing World

Broader purpose and the board

The importance of boards for corporate governance theory and practice cannot be overestimated. Over the past decades, significant attention has been paid to formal and structural issues in corporate govern-ance e.g. board composition and the separation of the role of Chair from the CEO and the role of non-executive directors (“NEDs”). Boards, together with top non-executives, are understood as being responsible for displaying leadership and setting the tone of the corporate culture.144 Finally, many recommendations

regarding organisational structure and the scope for operation of boards tend to be related to the struc-ture and engagement of the shareholder constituency and the relationship between the board and the shareholders.

As the structure of boards, culture, role and composition of shareholders, and the types of institutional constraints that govern shareholder interactions with boards tend to differ significantly across the uni-verse of listed corporations,145 the rules present in corporate governance codes often differ from the

reality experienced by individual corporations.146

With this in mind, the roundtable participants identified several good practices that may help boards to put in place and operate with a broader and long-term framing of corporate purpose. The debate in the roundtables addressed the role of non-executive directors, board diversity, procedural aspects like term-limits of board nomination and recall triggers. Issues of appointment, training, and certification were also discussed. In addition, roundtable participants discussed what collective responsibilities the board should have. Among these, the participants suggested that boards should be responsible for setting and oversee-ing a corporation’s mission, its long-term value creation strategy, stakeholder consultations, assessoversee-ing systemic risk and investigating complaints of major wrongdoing by the corporation.147

Non-executive directors

In the corporate governance debate, the importance of ‘independent directors’ or ‘non-executive direc-tors’ (“NEDs”) is routinely highlighted.148 However, it remains habitually unclear what this ‘independence’

means and what purpose it might serve.149 Both ‘non-executive’ and ‘independent’ can refer to multiple

ideas, including:

1. the provision of expertise and networks;150

2. bringing a view from outside the boardroom, focusing on the corporation as a whole and its long-term interests;

3. independence from the corporation itself152 and thus the provision of effective counterweight to

(internal) executives with a director role; and

4. the idea that “NEDs” can stand in for or represent the interests of specific constituencies and stakeholders.

Whether “NEDs” can and will provide any or all of these roles is constrained by four main factors.153 First,

there are recurring concerns about the skill base, knowledge set and limited range of backgrounds of non-executive directors. Second, the assumption that “NEDs” are in a strategic position to provide sufficient counterweight to executives is constrained by time, low remuneration, and, specifically in the US, a strong position for executives to select board members. Third, as the description of boards’ fiduciary duties has shown, “NEDs” are required to, first and foremost, serve the corporation’s interest.154 In serving sectional

Figure

table series have been generously supported by the

References

Related documents